Long-term unemployment easing, as many accept lower pay

September 10, 2012|By Steve Matthews, Bloomberg News

James Ensley, of Rocky Face, Ga., took a $10,000-a-year job last month as a school bus driver after almost two years of unemployment benefits ran out. While that's one-third of what he had made as a warehouse manager, the father of two says he's content.

"It feels great to go to work instead of having somebody tell you, 'I can't help you,'" said Ensley, 51, whose former employer went bankrupt in the housing slump. "I miss my old job, but it is not coming back so I have to get over it."

A surge in long-term unemployment, which Federal Reserve Chairman Ben Bernanke has cited as evidence of a "far from normal" labor market, is abating. That's good news for American companies, which are taking advantage of a pool of 5.2 million people whose career hardships have made them eager to return to work.

Most of the re-employed have had to settle for reduced pay, allowing businesses to keep labor costs low while boosting profits amid sluggish sales gains after the deepest recession since the 1930s.

"The cost of labor is very cheap," said James Paulsen, who helps oversee about $325 billion as chief investment strategist at Wells Capital Management in Minneapolis. "Nominal wage gains are very anemic," so these costs "are down and will likely stay down for a while longer."

The number of Americans out of work for 27 weeks or longer in July was 1.5 million fewer than the April 2010 peak, Labor Department data show. The total represented 41 percent of all jobless, the lowest share since 2009. The August figure dropped slightly to 40 percent, with about 5 million people unemployed long term.

Fifty-four percent of the long-term unemployed have had to settle for lower wages to secure another job, according to a Labor Department report released Aug. 24. One in 3 said their compensation was at least 20 percent less than what they made previously.

This has helped increase corporate efficiency and earnings. Seventy-one percent of companies in the Standard & Poor's 500 index reported profits that exceeded the consensus analysts' estimates in the most recent quarter, though 59 percent missed sales estimates, according to data compiled by Bloomberg.

Low labor costs will continue to boost results, said Charles Lieberman, chief investment officer at Advisors Capital Management. Companies in the S&P 500 probably will earn more than $110 a share next year, which could lift the index to about 1700, he said, from 1437.92 Friday. The median estimate of 11 analysts in data compiled by Bloomberg for earnings per share in 2013 is $106.75.

Inflation near the Fed's 2 percent target will give the policymaking Federal Open Market Committee flexibility to stimulate growth when it meets Sept. 12-13, said Lieberman, former head of monetary analysis at the Federal Reserve Bank of New York. The central bank's preferred price gauge, which excludes food and fuel, rose 1.6 percent in July from a year earlier.

The Fed has kept the target for its benchmark federal funds rate near zero since December 2008, and two rounds of bond purchases have helped swell its balance sheet to a record of almost $3 trillion.

"Despite the decline in the share of long-term unemployed, it remains about double what it should be in a healthy job market," said Mark Zandi, Moody's Analytics chief economist in West Chester, Pa. This is "a key reason why the Federal Reserve remains on high alert and more than likely to engage in additional quantitative easing."

The average length of joblessness remained about 39 weeks in August, after hitting a 15-month low in July, Labor Department figures show. Still, that's about twice the level of the 1981-82 recession, when unemployment reached 10.8 percent, compared with a high of 10 percent in October 2009.

"I do find it encouraging that at least the number has trended down," though it's still "very, very high," Atlanta Fed President Dennis Lockhart told reporters last month.

Being fired or laid off makes a job search increasingly tough for about six to eight months, said Rob Valletta, research adviser at the San Francisco Fed, who has studied the issue. After that, "employment prospects do not vary that much based on unemployment duration."

"Each month, an average of nearly 11 percent of the long-term unemployed find a job," according to an October 2011 paper Valletta co-wrote. While this is "a historical low in the U.S., it is nonetheless slightly higher than the outflow rate of the French unemployed." At this rate, "about half of the long-term unemployed in the U.S. will find a job within six months, and three-fourths will find a job within one year."

The standard 26-week package of unemployment insurance was extended to 99 weeks in 2009. Most of those benefits have been exhausted, and states with lower jobless rates have scaled back insurance, he said. Only 5,400 people were receiving extended benefits as of Aug. 10, down from 1.03 million in October 2010, according to the Labor Department.